Sunny Verghese, the chief executive of US$24 billion agribusiness firm Olam, is one of Asia’s most admired agitators for corporate sustainability, which made his confession at a conference last month all the more unsettling. He said he had spoken to 250 chief executives of companies with net-zero targets, and none of them “has a clue” about how they will fulfill their commitments, himself included.
Businesses have unleashed a torrent of pledges to rein in the carbon they emit since 2018, when the Intergovernmental Panel on Climate Change (IPCC) said that to limit global warming to 1.5° Celcius and avoid the worst consequences of climate change, net carbon dioxide emissions must reach zero by mid-century.
But the business world lacks a playbook for how to reach net-zero, said Verghese, who complained that there was no reliable way for businesses to measure their carbon footprint, let alone shrink it, and that business leaders are lacking the confidence that they can meet their own carbon reduction deadlines.
Such uncertainty hasn’t stopped companies from setting bold targets. One in five of the world’s biggest companies have made net-zero commitments, and 40 per cent of the world’s assets are now covered by a 2050 net-zero target.
Companies from the Asia Pacific region, the source of more than half of global carbon emissions, have been slower to jump on the net-zero bandwagon. Only a handful of APAC firms, including the likes of Singapore’s real estate City Developments Limited, DBS Bank and Malaysian oil firm, Petronas, have made net-zero announcements; 60 per cent of APAC firms have no decarbonisation ambitions at all, according to a recent study by ENGIE Impact, an energy and sustainability company.
What’s missing right now is a science-based definition of what a net-zero portfolio actually is, and the steps to get there.
Steve Bullock, managing director and global head of ESG innovation and solutions, S&P Global
While net-zero targets make for good headlines, there is growing scepticism about their credibility. Investors have started to question how companies are reporting carbon emissions, and governments are facing rising pressure to ensure corporate commitments stand up to scrutiny. Michael Salvatico, head of Asia Pacific ESG business development at S&P Global Sustainable1, a data intelligence firm, and co-author of a study for the Investor Group on Climate Change in Australia, noted that 32 companies used 35 different scenarios to report their climate disclosure.
“At the moment, companies are making a lot commitments, but there’s no standardisation [of the data],” says Salvatico. “We need to revisit how carbon is calculated. The carbon footprint is no longer just something companies report. It’s the starting point for a company’s net-zero trajectory. Investors and banks are looking for credible, robust targets, and they need to see consistency in how companies are reporting carbon.”
What does a real net-zero target look like?
A 2020 report by KPMG on 250 of the world’s largest companies found that the quality of climate-related risk disclosures was falling short, with only one in five firms providing scenario analysis of climate risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a framework for companies to report climate risk.
The first signal to determine the credibility of a net-zero target is whether or not it is science-based, which means it is aligned with the Paris Agreement, the treaty signed in 2015 to curb global warming to 1.5 degrees, said Steve Bullock, S&P Global’s London-based managing director and global head of ESG innovation and solutions.
As of September, 1,841 companies have signed up to the Science-Based Targets Initiative (SBTi), a platform set up in 2015 for companies to align their emissions with the Paris Agreement. Just 22 per cent of those firms are from Asia Pacific, according to data from SBTi co-founder CDP, an environmental non-profit.
But there is work to be done to ensure that science-based targets ring true for net-zero commitments. SBTi is now working on a standard for net-zero targets, and developing guidelines for how to set a Paris-aligned net-zero commitment.
“Paris-alignment gives an insight into how serious companies are,” said Bullock. “What’s missing right now is a science-based definition of what a net-zero portfolio actually is, and the steps to get there. It’s easy to set a 2050 net-zero target. But decarbonisation needs to start today.”
The starting point is not only understanding the carbon footprint of a company’s operations, but the carbon exposure of the entire portfolio and the supply chain, known as Scope 3 emissions. “You need a complete view of your baseline,” said Bullock.
The second way to tell how genuine companies’ net-zero commitments are is to assess how closely they track their emissions. S&P tracks how aligned comanies are with 1.5 degrees of warming, taking into account how the carbon intensity of the company has changed in recent years, and how it is projected to change by 2030, the Paris deadline by which global emissions must half to avoid climate calamity.
We won’t get to net zero by 2050 just by trimming emissions. We need systemic change in the real economy. Companies need to re-engineer how they work in a low-carbon economy.
Dave Chen, founder and chief executive, Equilibrium Capital
A third way is to scrutinise carbon offsets. If a company has bought offsets — projects such as wind farms and tree-planting schemes that reduce carbon dioxide to compensate for emissions made elsewhere — but has not eradicated all avoidable emissions, then it cannot genuinely claim to have reached net-zero.
The type of offsets is key, too. A good carbon offset should provide “additionality”, which means that purchasing it will remove emissions that would not have fallen anyway. It should also be properly measured, using metrics that are not based on a computer model but on actual proven emissions reductions.
“There is a role for offsets — providing those offsets are of sufficient quality,” said Bullock. “More data and transparency are needed around the relative benefits of different types of carbon offset projects. What carbon benefits do they really accomplish — and by when?”
The final thing to look for is how future-focused the company is. How exposed are they to physical risks, such as rising sea levels and extreme weather events? The level of disclosure on the measurement and management of physical risks is another a good indicator of how far on the net-zero journey a company is, noted Bullock.
What do investors look for in a net-zero target?
Investors are increasingly asking questions about corporate net-zero targets. In October, London-based Institutional Investors Group on Climate Change (IIGCC), a coalition with more than US$60 trillion in assets under management, called on electric utility companies globally to bring forward their net-zero targets from 2050 to 2035, to hasten climate action. Utilities account for about 40 per cent of global emissions.
Dave Chen, founder and chief executive of Portland-headquartered investment firm Equilibrium Capital, said that beyond carbon “belt-tightening” and buying offsets to scrub out unavoidable emissions, investors are looking at what companies are doing to fundamentally re-configure their businesses for the low-carbon economy.
“This is the hardest part — rethinking how you work,” said Chen, whose firm invests in sectors such as greenhouses for sustainable food production and biogas from dairy farming. “Investors are looking at how companies are re-engineering their manufacturing, supply chains and their acquisitions to drive down their carbon footprint across the board,” he told Eco-Business.
“We won’t get to net zero by 2050 just by trimming emissions. We need systemic change in the real economy. Companies need to re-engineer how they work in a low-carbon economy,” he said.
Activist hedge funds such as Jeffrey Ubben’s Inclusive Capital were looking to give carbon-intensive companies a nudge by making environmental, social and governance (ESG) investments in firms such as Exxon Mobil. “If the market is saying you’re on a declining slope [and not decarbonising], you’re dead man walking,” said Chen.
But to bet on genuinely net-zero companies, investors need better, more consistent, comparable data, said Bullock. This is why there has been a shift towards TCFD, because it gives clear guidance on how to report climate risk to investors in financial terms, he noted.
TCFD announced in October that it had updated its reporting standard, asking companies for more robust reporting on how climate risk will impact their financial performance. TCFD said all businesses needed to heed its recommendations, as climate-related risk would soon be considered material to a firm’s balance sheet.
Supporters of TCFD have grown by 70 per cent since last year, according to the TCFD, and regulators in Hong Kong, Singapore, Japan, New Zealand, Switzerland and the United Kingdom have said they will make climate-related disclosures mandatory.
Despite the record growth of companies jumping on the TCFD bandwagon in the past couple of years, many “continue to struggle to quantify the impacts of climate change, and to source the data they need to fully assess the threats of a changing climate,” TCFD chairman, Michael R. Bloomberg, said.
However, firms not reporting climate risk — like the majority of companies in Asia — are not escaping scrutiny, noted Salvatico. “Any company that avoids reporting is still being assessed; their emissions are being modeled and analysed,” he said, pointing out that S&P analyses the emissions of 15,000 public and 5,000 private companies.
But change is coming quickly, he added. Pointing to China, the world’s largest emitter of greenhouse gases, Salvatico noted that there was “very little reporting” just a few years ago.
“But recent trends have seen an increase in demand for S&P Global’s corporate reporting on Corporate Sustainable Assessment and climate risk reporting aligned with TCFD. Globally, we have witnessed large capital flows into ESG-themed funds and an increase in demand for S&P Global Ratings assessments of Second Party Opinions on sustainability-linked financing,” he said.
The same may be true of net-zero commitments. A flurry of announcements is expected around the COP26 climate talks, which start at the end of October in Glasgow, Scotland. “Net-zero wasn’t a concept that people even talked about two years ago. We’re right at the beginning of this curve. Momentum is growing,” said Salvatico.
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